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Fitch Affirms Georgia’s Basisbank at ‘B-’; Outlook Stable Ratings Endorsement Policy

Published: August 8, 2012 | 1:07 pm
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The COMMERCIAL TIMES

Fitch Ratings-London-07 August 2012: Fitch Ratings has affirmed JSC Basisbank’s (BB) Long-term Issuer Default Rating (IDR) at ‘B-’ with a Stable Outlook, and its Viability Rating (VR) at ‘b-’. A full list of rating actions is at the end of this rating action commentary.

Rating Action Rationale and Drivers: IDRS and VR

The affirmation reflects BB’s generally reasonable financial metrics, quite conservative management to date and the currently favourable Georgian operating environment. However, the ratings also consider the bank’s small size and limited franchise, significant non-core assets on the balance sheet and uncertainty resulting from the expected takeover of the bank.

BB’s loan quality is currently satisfactory, with exposures in arrears more than 90 days accounting for 1.8% of end-Q112 gross loans, and a further 4.1% of loans restructured. However, foreclosed assets and investment property at end-2011 were equal to a sizable 17% of gross loans at end-2011, or about half of Fitch core capital (FCC). Capitalisation is satisfactory, with the FCC/risk-weighted assets ratio standing at 16.8% at end-2011, and local regulatory ratios of 15.3% (Tier 1) and 15% (total) at end-H112. Performance is supported by a solid margin and improved scale efficiencies. Pre-impairment profit was equal to 6.4% of average gross loans in 2011, indicating significant loss absorption capacity through the income statement.

The loan/deposits ratio was a low 77% at end-2011, and liquid assets (including cash, placements with the National Bank of Georgia, short-term commercial interbank placements and unencumbered government securities) accounted for 33% of total assets at end-Q112. However, the short-term and somewhat concentrated funding base (the largest 20 deposits accounted for 37% of end-Q112 customer deposits) mean that some liquidity risk remains.

In July 2012, the bank announced that the Chinese Hualing Group (HG) would acquire a 90% stake in BB from current shareholders. While the new owner may be more able than the current local shareholders to provide capital to BB, the change in ownership gives rise to significant uncertainty in respect to BB’s future strategy, operations and balance sheet structure. HG has significant current and planned future investments in Georgia relating to the development of free economic zones, the mining and timber industries and a major commercial trade market/hotel/residential development outside of Tbilisi. HG plans to partly invest its own funds into these projects and to partly raise debt. Positively, Fitch understands that HG may purchase some of the foreclosed assets from BB’s balance sheet.

Rating Sensitivities- IDRS and VR

BB’s ratings could be upgraded if the bank’s financial metrics and management remain generally sound following the acquisition, related party lending continues to be limited, capital is strengthened (as a result of equity injections or the purchase of the foreclosed assets) and HG generally demonstrates its commitment to running BB as a standalone business.

Downside pressure on the ratings could arise if there was a marked increase in leverage or related party lending following the acquisition.

Rating Action Rationale, Drivers and Sensitivities- Support Rating and Support Rating Floor

BB’s Support Rating has been affirmed at ’5′ and its Support Rating Floor at ‘No Floor’, indicating the agency’s view that support from the Georgian authorities is uncertain, given the bank’s small share of banking system assets (1.2% of end-Q112). An upgrade of these ratings based on sovereign support would probably require a marked increase in market shares and systemic importance.

An upgrade of the Support Rating based on possible support from HG is unlikely, given the group’s relatively small size and lack of track record in the banking sector.

At end-Q112, BB was the 11th-largest bank in Georgia. The bank is currently 85% owned by 21 Georgian nationals, including the Chairman of the Supervisory Board, and the remaining 15% is held by the European Bank for Reconstruction and Development (EBRD). In June 2012, BB announced the acquisition of 90% of its shares by HG. The EBRD and the Chairman of the Supervisory Board are expected to retain a stake of 5% each.

The rating actions are as follows:

Long-term foreign currency IDR affirmed at ‘B-’; Outlook Stable

Short-term foreign currency IDR affirmed at ‘B’

Viability Rating affirmed at ‘b-’

Support Rating affirmed at ’5′

Support Rating Floor affirmed at ‘No Floor’

 

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